Professor Richard Holden talks about the economic impact of Brexit. The Conversation18.2 MB(download)
The UK has voted to leave the European Union but even before all the votes were counted volatility made its way across Asian markets and to Australia.
The S&P ASX200 has finished 3.3% down at the close, wiping off approximately $50 billion in value, while the Australian dollar has dropped 3.4% to 73.4 US cents.
Richard Holden, Professor of Economics at UNSW says the volatility is likely to continue at least for another 24 hours.
“We could see volatility, perhaps not as extreme as the current levels, for a really extended period of time,” Professor Holden says.
One of the major factors in this will be how affected UK banks and therefore Australian banks will be by this decision, as they rely on short term funding for their operations.
“If those markets start to dry up and there’s uncertainty about their funding getting rolled over, one day to the next, then that’s when things can go pear shaped within an incredibly short period of time,” he adds.
The position of hedge funds, banks and other financial institutions in betting on currencies in over-the-counter markets (not regular currency markets) in times like this, also adds to the uncertainty.
“Basically we don’t know, what we don’t know and suddenly there’s a liquidity crunch and someone gets into trouble and that has flow-on effects like we saw in 2008,” Professor Holden says.
He also warns that a drop in the Australian dollar shows that money could flow out of Australia and back to the UK as financial institutions there change their positions.
In the longer term, Brexit could affect the way Australian companies trade with the European Union through the UK.
“All of a sudden that’s going to be more complicated, it’s going to have to go through under some new trade agreement and we know that a series of bilateral trade agreements are always more complicated and have more nuance than large multilateral trade agreements,” Professor Holden says.
All this comes as Australia goes into the last week of an election campaign and this volatility will keep economic management top of mind for Australian voters.
“I don’t think either side of politics in Australia has an exclusive right to say they are going to be the best economic managers, I guess we’ll have to wait and see about that as well.”
Britain’s decision to leave the European Union has opened a fundamental crack in the western world. Australia’s relationship with the United Kingdom is grounded in the UK’s relationship with the EU.
Given Australia’s strong and enduring ties with the UK and the EU, the shockwaves from this epoch-defining event will be felt in Australia soon enough. Most immediately, the impending Australia-EU Free-Trade Agreement becomes more complicated and at the same time less attractive.
What will happen to trade ties?
The importance of Australia’s relationship with the EU tends to get under-reported in all the excitement about China. We might ascribe such a view to an Australian gold rush mentality. Nevertheless, Australia’s trading ties to the EU are deep and strong.
Such ties looked set to get stronger. In November 2015 an agreement to begin negotiations in 2017 on a free-trade deal was announced at the G20 summit in Turkey. Trade Minister Steven Ciobo said in April 2016 that an Australia-EU free trade agreement:
… would further fuel this important trade and investment relationship.
When considered as a bloc, the EU consistently shows up as one of Australia’s main trading partners. Consider the statistics below:
in 2014 the EU was Australia’s largest source of foreign investment and second-largest trading partner, although the European Commission placed it third after China and Japan in 2015;
in 2014, the EU’s foreign direct investment in Australia was valued at A$169.6 billion and Australian foreign direct investment in the EU was valued at $83.5 billion. Total two-way merchandise and services trade between Australia and the EU was worth $83.9 billion; and
the EU is Australia’s largest services export market, valued at nearly $10 billion in 2014. Services account for 19.7% of Australia’s total trade in goods and services, and will be an important component of any future free trade agreement.
This is all well and good. But when not considered as a bloc, 48% of Australia’s exports in services to the EU were via the UK; of the $169 billion in EU foreign direct investment, 51% came from the UK; and of Australia’s foreign direct investment into the EU, 66% went to the UK.
You get the picture.
The UK was Australia’s eighth-largest export market for 2014; it represented 37.4% of Australia’s total exports to the EU. As Austrade noted:
No other EU country featured in Australia’s top 15 export markets.
In short, the EU is not as attractive to Australia without Britain in it.
Beyond trade numbers
But the Australia-EU-UK relationship cannot be reduced to numbers alone. It also rests on values shared between like-minded powers.
Brexit represents the further fracturing of the West at a moment when that already weakening political identity is in relative decline compared to other regions of the world, notably Asia (or more specifically China).
EU-Australia relations rest on shared concerns such as the fight against terrorism advanced through police collaboration and the sharing of passenger name records. The EU and Australia also collaborated to mitigate climate change at the Paris climate summit. And they work for further trade liberalisation in the World Trade Organisation – but don’t mention agriculture.
Without the UK, these shared political tasks become harder.
Clearly, Australia-UK relations rest on a special historical relationship. However, it has seen efforts at reinvigoration, as British governments buckled under the pressure of the Eurosceptics among the Conservatives.
Beyond everyday trade, historical links have been reinforced through the centenary of the first world war and the UK-Australia commemorative diplomacy that has come with this four-year-long event.
Cultural ties are most regularly and publicly affirmed through sporting rivalries such as netball, rugby and most notably cricket. Expect these ties to be reinforced as the UK seeks trade agreements and political support from its “traditional allies”.
For those with British passports, there will be a two-year period of grace as the UK negotiates its exit. After that, it will be quicker to get into the UK at Heathrow, but this might be small consolation for the loss of a major point of access to the EU.
The vote to leave is a major turning point in Europe’s history. It marks a significant crack in a unified concept of “the West”. It is not in Australia’s interests.
It’s time for Australia to make new friends in Europe.
Defying expectations of a solid Remain victory, the UK has voted to Leave the European Union by about a 52-48 margin. Remain won easily in Scotland, London and some other big cities, but otherwise Leave swept. The Labour heartland north of England was expected to be better for Remain, but in fact Leave dominated.
Online polls had the contest neck and neck, while phone polls had Remain well ahead. So the online panel polls did better this time than live phone polls. Perhaps this was caused by shy Leave voters.
This vote was not just the result of anti-immigration sentiment. Many people on the left disliked the European Union because they thought it was too authoritarian.
Conservative British PM David Cameron put his authority on the line to get a Remain result. With Remain defeated, it is likely that Cameron will resign, and that the next PM will be more right wing than Cameron. 13 months after winning a shock majority for the Conservatives, Cameron is effectively toast.
Scotland voted heavily to Remain, and may well have another referendum on leaving the UK, following the failure of the first Independence referendum in 2014. If such a referendum were to succeed, the UK would be much reduced.
This result will also affect the Australian Federal election. The stock markets have crashed following the Leave vote, and economic uncertainty should be good news for the Coalition.
Trump slumps in US general election polls
A month ago, Hillary Clinton and Donald Trump were tied in the RealClearPolitics polling average, now Clinton leads by 6%. This has not happened because Clinton has gone up, but rather because Trump has gone down.
Not only is Trump trailing in the polls, he is struggling to raise money. He raised just $3.1 million in May, compared to over $28 million for Clinton, and he ended May with only $1.3 million in cash on hand, $41 million behind Clinton. All currencies here are US.
Presidential candidates need to raise huge amounts of money so they can fund ads and pay campaign staff. At the moment, Trump is getting pummelled in the ad wars, and Clinton has a far larger staff.
There has been some recent speculation that Trump could be dumped at the Republican convention by a delegate revolt. The convention rules are set at a pre-convention meeting, and it is possible that the rules meeting could unbind all delegates, or require a 2/3 supermajority on the first ballot, which Trump would be unlikely to meet. Many delegates pledged to Trump in fact support Cruz, so it is possible Trump could lose if delegates were unbound.
If Trump lost in such a Game of Thrones type coup, it would enrage his supporters. Whether establishment Republicans or movement conservatives like it or not, Trump won the nomination by a large margin, and to deny him at the convention would be highly undemocratic.
If there is a delegate revolt, but Trump still wins, as is very probable, the revolt will further damage him in the general election. If he loses, his supporters are unlikely to be reconciled to the eventual nominee.
According to an Essential poll, Australians wanted the UK to stay with the EU by a 38-22 margin, with 40% undecided. Australians preferred Clinton to Trump by a 71-15 margin.
Queensland Newspoll has Labor ahead 51-49
A Queensland Newspoll, taken over May and June from a sample of 1450, has Labor leading by 51-49, a one point gain for the Liberal National Party (LNP) since the October to December poll. Primary votes are 38% for Labor (down 3), 40% for the LNP (up 1) and 8% for the Greens (steady). Premier Annastacia Palaszczuk’s satisfied rating is 44% (down 6) and her dissatisfied rating is 42% (up 7) for a net approval of +2. In his first Newspoll as opposition leader, Tim Nicholls has a net approval of -5.
Normally the primary vote shifts would have produced a 2 point gain for the LNP after preferences. However, Queensland has changed from optional preferential to compulsory preferential voting, and this change has mitigated the primary vote swing.
Around a third of the population have trouble sleeping, including difficulties maintaining sleep throughout the night. While night time awakenings are distressing for most sufferers, there is some evidence from our recent past that suggests this period of wakefulness occurring between two separate sleep periods was the norm.
Throughout history there have been numerous accounts of segmented sleep, from medical texts, to court records and diaries, and even in African and South American tribes, with a common reference to “first” and “second” sleep. In Charles Dickens’ Barnaby Rudge (1840), he writes
He knew this, even in the horror with which he started from his first sleep, and threw up the window to dispel it by the presence of some object, beyond the room, which had not been, as it were, the witness of his dream.
Anthropologists have found evidence that during preindustrial Europe, bi-modal sleeping was considered the norm. Sleep onset was determined not by a set bedtime, but by whether there were things to do. Historian A. Roger Ekirch’s book At day’s close: night in times past describes how households at this time retired a couple of hours after dusk, woke a few hours later for one to two hours, and then had a second sleep until dawn.
During this waking period, people would relax, ponder their dreams or have sex. Some would engage in activities like sewing, chopping wood or reading, relying on the light of the moon or oil lamps.
Ekirch found references to the first and second sleep started to disappear during the late 17th century. This is thought to have started in the upper classes in Northern Europe and filtered down to the rest of Western society over the next 200 years.
Interestingly, the appearance of sleep maintenance insomnia in the literature in the late 19th century coincides with the period where accounts of split sleep start to disappear. Thus, modern society may place unnecessary pressure on individuals that they must obtain a night of continuous consolidated sleep every night, adding to the anxiety about sleep and perpetuating the problem.
Less dramatic forms of bi-phasic sleep are evident in today’s society, for example in cultures that take an afternoon siesta. Our body clock lends itself to such a schedule, having a reduction in alertness in the early afternoon (the so-called “post-lunch dip”).
In the early 1990s, psychiatrist Thomas Wehr conducted a laboratory experiment in which he exposed a group of people to a short photoperiod – that is, they were left in darkness for 14 hours every day instead of the typical eight hours – for a month.
It took some time for their sleep to regulate but by the fourth week a distinct two-phase sleep pattern emerged. They slept first for four hours, then woke for one to three hours before falling into a second four-hour sleep. This finding suggests bi-phasic sleep is a natural process with a biological basis.
Pros and cons
Today’s society often doesn’t allow for this type of flexibility, thus we have to conform to today’s sleep/wake schedules. It is generally thought a continuous seven to nine-hour unbroken sleep is probably best for feeling refreshed. Such a schedule may not suit our circadian rhythms however, as we desynchronise with the external 24-hour light/dark cycle.
To successfully maintain a split sleep schedule, you have to get the timing right – that is commencing sleep when there is a strong drive for sleep and during a low circadian point in order to fall asleep quickly and maintain sleep.
Some of the key advantages of a split sleep schedule include the flexibility it allows with work and family time (where this flexibility is afforded). Some individuals in modern society have adopted this type of schedule as it provides two periods of increased activity, creativity and alertness across the day, rather than having a long wake period where sleepiness builds up across the day and productivity wanes.
In support of this, there is growing evidence suggesting naps can have important benefits for memory and learning, increasing our alertness and improving mood states. Some believe sleep disorders, like sleep maintenance insomnia, are rooted in the body’s natural preference for split sleep. Therefore, split sleep schedules may be a more natural rhythm for some people.
Implications for shift work
Split sleep schedules have recently begun to emerge as a potential alternative to continuous night shift work. Working at night has the combined problems of prolonged wakefulness (often working eight to 12 hour shifts) and circadian misalignment (working at a time of night when you would normally be asleep). Shift workers frequently complain of fatigue and reduced productivity at work and they are at increased risk for chronic disease such as obesity, type 2 diabetes and heart disease.
Some industries have employed schedules with shorter, but more frequent sleep opportunities on the premise that the drive for sleep will be less with reduced time. For example, six hours on/six hours off, four hours on/eight hours off, and eight hours on/eight hours off, limit time on shift and reduce extended periods of wakefulness. Split sleep/work schedules divide the day into multiple work/rest cycles so employees work multiple short shifts, broken up with short off-duty periods every 24 hours.
Split-shift schedules that maintain adequate sleep time per 24 hours may be beneficial for sleep, performance and safety. A number of recent studies have found split sleep provides comparable benefits for performance to one big sleep, if the total sleep time per 24 hours was maintained (at around seven to eight hours total sleep time per 24 hours).
However, as might be expected, performance and safety can still be impaired if wake up and start work times are in the early hours of the morning. And we don’t know if these schedules afford any benefits for health and reduce the risk for chronic disease.
While the challenges of night shift work cannot be eliminated, the advantage of some split shift schedules is that all workers get at least some opportunity to sleep at night and do not have to sustain alertness for longer than six to eight hours.
Although we aspire to have consolidated sleep, this may not suit everyone’s body clock or work schedule. It might in fact be a throwback to a bi-model sleep pattern from our pre-industrial ancestors and perhaps work well in a modern industrial setting.
And yet, the Australian government and the Labor opposition maintain an unwavering, untested, bipartisan assertion: no-one will be resettled in Australia, as that will encourage people smugglers.
By extension, Australia will not accept New Zealand’s offer to resettle 150 refugees, as that will provide an equivalent incentive to the people-smuggling trade.
The historical evidence suggests the government’s fears are unfounded. People smuggling will not revive simply because refugees are resettled in Australia. There are good reasons to believe refugees currently stuck in offshore detention on Nauru and Manus Island can be relocated to Australia and New Zealand without this leading to a revival of boat traffic.
A short history
Offshore processing and turning back boats on the high seas were introduced in 2001 and again in 2013 in response to a growing number of boat arrivals.
Between 1999 and October 2001, more than 10,000 asylum seekers arrived on Christmas Island by boat. Between June 2011 and September 2013, 40,000 people arrived. But when offshore processing and turnback policies were introduced, the boats stopped arriving in both periods within months.
But what happened to the asylum seekers detained offshore during the Howard government years?
From 2001 to 2008, of the 1,153 refugees and asylum seekers resettled from Nauru and Manus Island, 705 went to Australia, 401 to New Zealand and 47 to other Western countries. Resettlement of all but 82 occurred under the Howard government, with most occurring from 2002 to 2004. A further 483 people were found not to be refugees and returned to their countries of origin.
The resettlements occurred without fanfare, while maintaining the official policy of offshore detention and processing, and boat turnbacks. From 2002 to 2007, 18 boats arrived with 288 asylum seekers. In addition, one boat was turned back with 14 passengers.
In 2008, after the Rudd government dismantled the offshore processing and turnback policies, seven boats arrived with 161 asylum seekers. This number spiked dramatically from that time.
This analysis suggests the threat of offshore detention and processing and boat turnbacks is a clear deterrent to prevent people coming to Australia by boat. Importantly, the deterrent effect does not rely on a blanket ban on resettlement of refugees from Nauru and Manus Island to Australia and New Zealand.
No long-term resettlement options
Accept for the moment that offshore processing and boat turnbacks are necessary to deter asylum seekers from travelling by boat to Australia.
Accept that these policies stem an uncontrollable flow of humanitarian migration through Indonesia to Australia, prevent people drowning at sea and enable Australia to resettle more refugees through the UN High Commissioner for Refugees’ resettlement program.
The policy issue in 2001 and 2013 was the uncontrollable arrival of boats. But the issue now is where and when to resettle refugees and asylum seekers who have been sent to Manus Island and Nauru since the reintroduction of offshore processing. On this issue, there is no plan.
If this analysis of the incentives proves to be wrong, and it turns out that resettling refugees from Nauru and Manus Island in Australia and New Zealand does increase the number of asylum-seeker boats attempting to reach Australia, we know from the experiences of 2001 and 2013 that the combination of offshore detention and boat turnbacks is an extremely effective deterrent – one that can swiftly be reinstated.
In July 2013, the month Kevin Rudd announced no asylum seeker arriving by boat would ever be resettled in Australia, 4,338 people arrived by boat in Australia. After Rudd announced the new policy, the number dropped to 1,650 in August and 861 in September. None of these asylum seekers ended up in Australia, instead being transferred to Nauru or Manus Island.
In October 2013, when the new Coalition government added a turnback policy to offshore processing and resettlement, 346 people were intercepted and transferred to Nauru or Manus Island. This dropped to 222 in November, then rose to 369 in December. And then, in the 31 months from January 2014 to the present, there has been just one boat with 158 passengers transferred to Nauru.
In addition, from January 2014 to July 2015, 20 boats were intercepted and turned back to Indonesia or other countries in the region, carrying a total of 633 passengers.
At any time offshore detention and processing have been in place, the number of boat arrivals has been very small. We can be confident that, if necessary, a vigorous reinstatement of regional processing and the turnback policy would once again “stop the boats”.
But at this time, in light of the ongoing and intensifying humanitarian crisis on Nauru and Manus Island, there is no case for maintaining the inflexible bipartisan line on resettlement.
Alex Reilly, Deputy Dean and Director of the Public Law and Policy Research Unit, Adelaide Law School